Category Archives: Estate Planning

Often, a client will call to say a relative died with a lot of debt and few assets: a checking account, maybe a small savings and a boatload of debt.

We go over the situation and I explain that we can collect up to $100k of assets in a deceased’s own name without a probate using a small estate affidavit.

Good, good…they say… tell me more. But… I say (there’s always a but)… there is a slight problem in that someone has to sign the small estate affidavit and swear that all debts already have been paid.

Usually this means that the heir has to use his own money to pay the debts. No one wants to front the money to pay debts, so the heirs just abandon the account and do nothing to collect it.

The small estate affidavit works well to collect straggler assets left in a deceased;s name, but not when there is a lot of debt.

The small estate affidavit in Illinois was just amended. It now provides a listing of the priority of creditors and allows the creditors to be paid directly from the funds in the deceased’s name. But whoever signs the small estate affidavit is now REALLY on the hook for any unpaid debts because they have to agree to pay back any and every creditor who is NOT paid (including attorney’s fees). This is the language in the new small estate affidavit (read this and weep):

“I understand that the decedent’s estate must be distributed first to satisfy claims against the decedent’s estate as set forth in paragraph 7.5 of this affidavit before any distribution is made to any heir or legatee. By signing this affidavit, I agree to indemnify and hold harmless all creditors of the decedent’s estate, the decedent’s heirs and legatees, and other persons, corporations, or financial institutions relying upon this affidavit who incur any loss because of reliance on this affidavit, up to the amount lost because of any act or omission by me. I further understand that any person, corporation, or financial institution recovering under this indemnification provision shall be entitled to reasonable attorney’s fees and the expenses of recovery.”

So those in Illinois signing a small estate affidavit to collect assets for a “negative” estate should be extra careful because there is big time liability should the debts not be paid.

I’m not sure why the Illinois legislature keeps jazzing around with law issues that don’t need to be fixed. It’s not like there is a shortage of messed up things that they could be fixing with new laws.

A couple years ago they gave us the Real Estate Transfer on Death Instrument Act. I think about two people have used that brilliant law to avoid probate on their homes. I have never seen a single property with a transfer on death instrument on it.

Now, the legislature also amended the power of attorney for health care law effective January 1, 2015. The old power of attorney for health care was just fine in my humble opinion.

The new one starts out with three pages of explanation to the person signing it. It is now written so that an 8th grader could understand it. But the intro/explanation is way too long and I doubt many people are going to read much of it.

There is a big change in the section on life-sustaining treatment. The old power of attorney gave three choices for life sustaining treatment and most clients picked the first one of the three. These were the OLD choices:

I do not want my life to be prolonged nor do I want life sustaining treatment to be provided or continued if my agent believes the burdens of the treatment outweigh the expected benefits. I want my agent to consider the relief of suffering, the expense involved and the quality as well as the possible extension of my life in making decisions concerning life sustaining treatment.

I want my life to be prolonged and I want life sustaining treatment to be provided or continued, unless I am, in the opinion of my attending physician, in accordance with reasonable medical standards at the time of reference, in a state of “permanent unconsciousness” or suffer from an “incurable or irreversible condition” or “terminal condition”, as those terms are defined in Section 4 4 of the Illinois Power of Attorney Act. If and when I am in any one of these states or conditions, I want life sustaining treatment to be withheld or discontinued.

I want my life to be prolonged to the greatest extent possible in accordance with reasonable medical standards without regard to my condition, the chances I have for recovery or the cost of the procedures.

Now there are only two choices on life sustaining treatment in the NEW power of attorney:

The quality of my life is more important than the length of my life. If I am unconscious and my attending physician believes, in accordance with reasonable medical standards, that I will not wake up or recover my ability to think, communicate with my family and friends, and experience my surroundings, I do not want treatments to prolong my life or delay my death, but I do want treatment or care to make me comfortable and to relieve me of pain.

Staying alive is more important to me, no matter how sick I am, how much I am suffering, the cost of the procedures, or how unlikely my chances for recovery are. I want my life to be prolonged to the greatest extent possible in accordance with reasonable medical standards.

So my brilliant legal examination is this: Choice 1 in the old form, selected by most clients and which said “leave it up to my agent” has been eliminated from the form. The new choice 2 has been reworded and is close to the old choice 2. Choice 3 remains the same as before for the most part.

In the new form, everyone will pick Choice 1 and no one will pick the second choice. The first choice now asks for a doctor’s opinion, but is that required or just advisory? Who knows.

I see no reason for all this wordsmithing. There was no problem with the old poa. Thankfully, old power of attorneys do not have to be redone and are still valid. I have been offering the new one to clients and we will see how it goes.

I have a client who keeps his living trust in his freezer. Oh, don’t worry, he says, “It’s in a plastic bag.” He knows where it is, but I don’t think his kids will ever find it because he’s super secretive.

Another client kept his trust in a large safe at home. Someone broke in and stole the entire safe-and his trust went bye-bye. I don’t think the thief was after his trust.

In the last few years, I’ve had dozens of client lose their living trusts and other estate planning documents. It happens a lot. The trust is kept in a big binder that says “Estate Planning Portfolio” so it’s not super easy to lose. If a client loses a trust, we set up a time to have the client come in to sign a restatement of the trust, a new will and new power of attorneys. The restatement “becomes” the trust so having the original trust is not necessary once the restatement is signed.

You can get by with copies of a trust, a trust restatement, power of attorneys and living wills, but you ALWAYS need to keep track of your original pour-over will (or any will for that matter). Only original wills can be filed after a death, not copies. Any property left outside your trust can end going to different heirs than those named under your trust if you have no original will.

For about the last 8 years, I’ve kept a scanned copies of the trust, will, power of attorneys and living will and that helps a lot when a client loses their originals.

The best place to store a trust is to keep the originals at home and tell your successor trustee where it is kept. Also keep a copy online somewhere. Yahoo, google and dropbox are all good for this.

I don’t recommend keeping a trust in a safe deposit box. The boxes are too hard to get into after a death and are a complete hassle most of the time. It’s okay to put a trust or will in a safe deposit box if you have a child or your successor trustee as signers on the box and they can get entry to it. Otherwise, it’s a waste.

There are a million reasons that people put off signing a will. This cool infographic says the three biggest reasons are: procrastination, too expensive and “I don’t need one.”

I can testify that the days of clients coming into a lawyer’s office for two appointments to sign a will are long gone. Clients are too busy. Instead, many prepare wills online, like they do everything else.

Unfortunately, only about 40% of the population signs a will during their lifetime.

Recently, I started offering to clients the convenience of online preparation of wills, power of attorneys and living wills. No office visits are necessary but of course, you are free to come in and sign it if it’s convenient for you.

Why shouldn’t I just order a Suzie Orman kit for $29.95? Because it is a canned form and too hard to choose the options that are right for you. Clients are always concerned that the end result will be messed up or totally invalid.

Why shouldn’t I go to Legalzoom and order a will? Because if takes almost a week to get it, it’s expensive and no attorney reviews it.

I charge a flat fee of $150 (single person) or $300 (married couple)for an attorney-prepared will-based estate plan that includes a will, power of attorney for property, power of attorney for health care, living will and HIPPA authorization. Use the coupon code “closing” to reduce the cost to $125 and $250.

The 5 steps to getting this done are shown in the graphic above. Clients register, fill out a questionnaire and pay by credit card. I review the information, draft the documents and they are sent to a secure web site and mailed to the client. You can fill it in the information from any computer, even your Ipad. The documents are emailed to you and signed in the privacy of your home.

On July 1, 2011, Illinois redid its laws regarding power of attorneys (POAs) for health care and property.

POAs for property are used to control property outside of a living trust in the event of a disability. A POA for health care designates who makes health decisions if one is incapacitated.

The changes are not gigantic or earth-shattering. But it would be a wise idea for clients to update their poas just to be safe. This excellent article describes the changes in detail.

To summarize, the new law does the following:

1. Sets out new “standard” forms with supposedly simpler, more direct language.

2. Includes a notice to the agent (the person who uses the poa) to describe better his or her duties as agent.

3. Limits who can act as agent (no relatives, doctors or agents).

4. Updates the POA for health care to make it easier to understand and includes some HIPAA provisions.

It would be wise to update your POAs to comply with the new law. Most clients never have to use their POA. But if they do need it, they want the bannk or health care provider to accept it and not hassle them to death, right? Banks and health care providers can be reluctant to accept POAs that don’t look like the most recent form set out in the statute. So why not play along and update your POAs.

Since the witnessing and notarizing are kind of confusing, I think it’s better to have an attorney handle it for you. If you are a do-it-yourselfer (or just curious), examples of the new forms are here.

It used to be that only married couples could hold title to their primary residence as tenants by the entirety. The advantage of this form of ownership is that the property is protected from creditors if one spouse is sued or files bankruptcy (it’s not protected if both spouses get sued or file for bankruptcy).

Now, under the new Illinois Civil Union Act, couples can hold title to their residence as tenants by the entirety, just like married couples. So what is the best way to hold title to real estate for couples united under the new civil union act?

There are at least two options:

1. Tenants by the Entirety. This means that if one dies it snaps to the other avoiding probate. On the second death, however, a probate will be necessary to transfer title unless the property is transferred to a trust in between. The property is protected from creditors. I like this form of ownership if the couple has an existing mortgage or plans to refinance down the line.

2. A living trust as tenants by entirety. The law now allows a couple to hold title to their primary residence in a trust (or trusts) as tenants by the entirety. So the couple gets the probate avoidance of the trust and the asset protection of tenancy by the entirety. The trust/tenancy by entirety law is new as of January 1, 2011. I like this form of ownership for properties that have no mortgage and where there are asset protection concerns or a high liability job.

There were big changes in the inheritance tax laws recently. For the most part, the changes affect only the super-rich (estates of over $5 million).

But, a number of clients have come in for living trust review appointments lately wanting to know if they should get rid of their trust because of the changes in the estate tax laws. My policy always has been to meet with existing clients annually for a free review of their trust. This encourages clients to come in (since they know they won’t get a $300 bill) and it helps keep trusts up to date and properly funded.

Several clients have asked if they should just ditch their trust due to the fact that the estate tax doesn’t start until $5 million in assets. The short answer: Keep the trust.

Here’s why:

1. Avoiding Probate. Revocable living trusts avoid probate. The filing fees and other costs for a Cook County probate are now around $700.00 and attorney’s fees will be about $2000.00. Clients don’t like this and can sidestep these costs by using a trust.

2. Estate tax limits change every five minutes and will soon go back to $1 million. For 2011 and 2012, the estate tax exemption amount is $5 million. But, this will change again in 2013 back to $1 million. Living trusts for married couples often use a formula that sets up A/B or family/marital trusts upon the first spouse’s death. The purpose of this is to avoid estate tax on the amount in the family trust of the first spouse to die. I think it’s best to keep your A/B trust intact if you are a married couple since you will need it when the amount clicks back to $1 million in 2013. The A/B trust protects the surviving spouse’s assets from creditors and insulates the assets in the event of remarriage.

3. Portability won’t last. Under the new law, married couples won’t even need A/B trusts because of the new concept called “portability.” This means if one spouse dies without a trust, the surviving spouse can file an inheritance tax return for the deceased spouse and claim the funds in the deceased spouse’s name as exempt from inheritance tax, even if the deceased spouse did not have an A/B trust. Wow, confusing, huh? The problem with this: It forces the survivor to pay to file an inheritance tax return (not cheap) on the first death and both spouses must die by the end of 2012 for it to “work.” And the clients still has to find a way to avoid probate on all of their assets. So it’s crazy for a married couple to get rid of their trusts because of portability.

For a nice summary of the many changes brought by the estate tax law, please read a series of posts by a Chicago lawyer that cover in detail and with clarity the many changes to the estate tax laws.

Here are a few that you should be aware of :

1. Illinois tax kicks in at $2 million. The Illinois inheritance tax used to run parallel with the federal tax. Not any more. If you have a large estate, the best solution to this problem is to buy a foreclosed condo in Florida and become a Florida resident since it has no state inheritance tax or state income tax.

2. Gifting can go up to $5 million lifetime. It used to be that the lifetime limit for gifting was $1 million. Now it’s $5 million, which is sweet, especially if you are the progeny of a rich dude.

So don’t ditch your living trust, just be sure that it says what you want it to say and that it’s properly funded with life insurance, real estate and the other fruits of your labor.

If you leave money outright to your children or heirs, the inheritance can be lost by your heirs in several ways: Divorce, creditors or bankruptcy are the main culprits.

There’s a simple way to avoid this and to protect the heir from him or herself.

In the trusts that I prepare, most clients choose to leave the inheritance in a “flexible protective trust.” This is fancy name for a “spendthrift trust.” Usually, a flexible protective trust leaves it up to the child/heir to decide whether to withdraw the funds ( if the coast is clear) or leave the funds in the trust where the inheritance is protected.

Inherited money that the child leaves in a flexible protective trust cannot be taken in the child’s divorce, cannot be attached by child’s creditor and it is exempt is bankruptcy, meaning the child will not lose the inherited money if he files bankruptcy.

A recent bankruptcy court case, In re Lunkes, illustrates that there is really no reason to leave an inheritance directly to a child or heir. It is always better to play it safe and at least set up a flexible protective trust and let the heir decide if it should be protected within the trust or not.

In the Lunkes case, a parent died and left money to the children, but the funds were left outright, not in a flexible protective trust. One of the kids filed a chapter 7 bankruptcy and claimed that the inheritance was exempt, and that he should be able to keep the inheritance. The kid’s argument was that, hey… the funds are still being administered in the trust (there was a lot of real estate that now takes an eternity to liquidate) so since I don’t have the inheritance yet, it can’t be taken away in the bankruptcy. The court said, sorry, the funds were left outright to the child, not in a flexible protective trust, so the inheritance goes to the bankruptcy trustee. This could have easily been avoided by using a flexible protective trust. Inherited money left in a flexible protective trust is exempt in bankruptcy (meaning the child/heir gets to keep the inheritance).

There are only three rules to for setting up a flexible protective trust:

1. The funds have to be held in trust, not left outright.
2. The child/heir cannot be the trustee.
3. The trust has to contain a spendthrift clause. Most trusts contain these. An Illinois spendthrift clause reads like this: “No interest under this instrument shall be assignable by any beneficiary, or be subject to the claims of his or her creditors, including claims for alimony or separate maintenance. The preceding sentence shall not be construed as restricting in any way the exercise of any right of withdrawal or power of appointment or the ability of any beneficiary to release his or her interest.”

The truth is that very few heirs are going to actually leave the inherited money in the trust. But it’s best to give them the option, right? I don’t charge any extra fees for drafting a flexible protective trust provision. It’s very easy to do. It’s my default, go-to way to distribute to the heirs in 99% of trusts that I draft.

So, do your heirs a favor and at least give them the option of protecting their inheritance in a flexible protective trust.

Most married couples hold title to their home in “tenancy by the entirety.” Married couples quit holding title as joint tenants when tenancy by the entirety was allowed in the mid 90’s in Illinois.

This means that if one dies, the house snaps to the other avoiding probate. Also, the house is protected from creditors. So if there is a court case against one spouse, the winner of the court case cannot enforce the judgment against the house. If the court case is against both spouses, the creditor can try to take the house.

Until recently, if the married couple had a living trust, and chose to deed the house to their trust, the couple lost the protection of tenancy by the entirety. A new law just passed that allows a married couple to hold title to their home (it only applies to a primary residence) in a living trust and keep the protection of tenancy by the entirety. (To be honest, I’ve never understood why the legislature allows married couples to protect their assets from creditors, but not single, divorced or widowed folks?)

The deed will convey title to the living trust, but will also state that title is being held as tenants by the entirety. Both spouses have to be trustees of the trust and the trust has to be for their benefit.

Many living trusts that I review have only one trustee. From what I see, the trust will have to be amended to add both spouses as co-trustees. I almost always put both spouses on as co-trustees so changing title to the new tenants by entirety/living trust hybrid will be pretty easy for me.

I like the new tenancy by entirety/living trust form of ownership and suggest that clients take advantage of this (almost) free form of asset protection.

At home, I received a newsletter from a northwest suburban lawyer who prepares a lot of living trusts. This attorney does a lot of seminars and I must be in his direct mail target market now that I am old enough to be in the AARP army. I scanned the newsletter expecting the usual boilerplate, but one story left me amazed.

It was about how the attorney was experiencing a rash of probate estates that had to be opened for clients with living trusts. (Spoiler alert: You’re not supposed to have a probate with a living trust.)

The story pointed out that the clients simply were not “funding” their trusts correctly, which is the process of changing beneficiaries and the titles of accounts to the living trust. A trust has to be properly funded to avoid probate. If any asset valued at more than $100,000.00 is left in the client’s own name (not jointly or in the trust) a probate will be necessary. Avoiding probate is one of the reasons to use a living trust over a will, so the newsletter story pointed out that this was huge failure. Rather than blaming himself for this, the attorney laid responsibility for this problem squarely where it belonged —on all of his misguided, wayward clients.

After all, he gave the client a letter telling them exactly how to fund their living trust. Why couldn’t the client simply follow his instructions? This attorney is part of the “go in peace my son and fund the trust yourself” school of attorneys. Oddly, when attorneys refuse to participate in funding of trusts, the cost of the trust is usually pretty high. But many attorneys consider trust funding to be beneath them.

I believe that attorneys who draft living trusts have an obligation to help the client fund the trust. I have drafted thousands of living trusts for clients and my clients are intelligent people. They are also very busy and have a million demands and obligations. They do not have the time or the interest to learn how to fund their living trust. Nor should they have to.

I have tried every imaginable combination of methods for funding trusts and after 20 plus years, I’m convinced that, for me, there is only one way to handle trust funding that works. Both the attorney and client have to be involved:

1. It is too much to sign the trust and other documents AND fund the trust in one meeting, unless the trust funding is really simple. I usually sign the trust in one meeting and fund the trust in a second meeting.

2. At the trust signing I set up an appointment for two weeks down the line with the client for a trust funding meeting. If I don’t schedule an appointment at the trust signing, there is about a 60% chance the client will never get back to me and the trust will be left unfunded.

3. At the trust signing, I make a list of the forms that the client must obtain. The client calls for the forms and the forms are mailed or faxed to the client. Many institutions will not send the forms to me, so the client has to undertake this step. I have many of the common forms on file for Fidelity, Vanguard, Schwab and some of the more common companies.

4. From trial and error I have developed one unwavering rule: All beneficiaries must be changed on life insurance and IRA accounts. Many clients say “Oh don’t worry I know my spouse is primary and kids are secondary.” I always change the beneficiary designation for all IRAs and life insurance, even if the trust is not the beneficiary and no matter what the client says. I would estimate that about 75% of the current beneficiary designations are screwed up, missing or wrong.

5. Once all of the forms are obtained by the client, we have the trust funding meeting with the client in my office. I tell the client it will be the most boring 30 minutes of his or her life. I sort through the forms and fill them out for the client. The client signs them. I scan the forms into pdfs and we mail in the originals.

6. The trust funding meeting is essential. Sometimes the client will say “I’ll just drop off the forms and you can fill them in when you have time.” This does not work. First, the client will usually forget to drop off the forms. Second, I will never have the time to complete them. The trust funding meeting forces the client and me to finish the job.